What to do when a crowdfunded product hits a delay

Why crowdfunding creators should ask for more money than they think they'll need

So you reached your crowdfunding goal. Now what?

Thousands of entrepreneurs take to crowdfunding sites such as Kickstarter and Indiegogo to raise money for never-before-seen products. But the path to delivering them can be fraught with problems in manufacturing, certification, funding or design. And delivery delays can leave enthusiastic backers disappointed.

“They’re handing you money for a product that doesn’t exist, which means they really, really want this product,” said attorney Anthony Zeoli, a Chicago-based crowdfunding expert.

More than 75 percent of crowdfunded projects are delayed, according to research by University of Pennsylvania Wharton School professor Ethan Mollick. And projects that far exceed their funding goals are more likely to be delayed, the research says.

Companies that have faced this issue include Chicago’s Everpurse, which makes smartphone-charging handbag technology and now plans to fill orders through a new deal with Kate Spade; San Francisco-based Coin, whose card-sized digital tool aims to replace credit cards; and Menlo Park-based virtual reality headset maker Oculus Rift, which Facebook acquired for $2 billion in 2014.

Delays often come down to money shortages, and crowdfunding experts say companies can use communication as a tool to prevent customers from losing patience.

Zeoli said that keeping backers informed by updates on crowdfunding pages can help manage expectations from the start. He also noted that first-time entrepreneurs don’t always ask for enough money because they aren’t aware of potential obstacles, particularly for new products. Creators should ask for 10 to 20 percent more funding than they think they’ll need, he said.

“The people who are doing it are just not as equipped to know the amount of money that they need, so they run really, really thin,” Zeoli said. “They’re really skimming the absolute minimum amount of money that they need, so when they hit a hurdle, it becomes a problem.”

Rose Spinelli, a Chicago-based crowdfunding consultant, said sometimes companies get caught up in celebrating that they’ve blazed past their goal and accept too many orders, losing track of the attendant rising costs and production demands. She recommended that creators set a limit on how far they'll go.

Also essential, she said, is having someone on the team with manufacturing experience.

“A lot of time people that run campaigns are good at what they do ... but they’re not so good or have zero experience in manufacturing,” Spinelli said. Even language barriers with overseas manufacturers can be an issue.

On the consumer end, Spinelli said, backers should carefully assess campaigns before contributing and be alert to the fact that the item doesn’t yet exist.

When things go wrong, backers of crowdfunding campaigns have different options for recourse than do those who place pre-orders through established online stores. Companies that fail to fill pre-orders could be in violation of contract law, Zeoli said, which would be handled in civil court. But for crowdfunding campaigns that don’t deliver, the state attorney general might get involved, he said. In both cases, backers could potentially pursue class action suits since they wouldn’t find it cost effective to sue for the small amount paid to these campaigns.

When state attorneys general learn about potential crowdfunding fraud, Zeoli said, they may chase those cases, seeking to make examples of them.

In 2014, the Washington state attorney general’s office filed a consumer-protection lawsuit against a Kickstarter campaigner, Edward J. Polchlopek III, known as Ed Nash, who in 2012 raised $25,146 from 810 backers on the platform for his Asylum Playing Cards. The office said Polchlopek “took consumer money and failed to deliver the promised playing cards and other rewards” to the backers. The office also said Polchlopek’s company had stopped communicating with its backers.

The attorney general’s office said it was first suit of its kind in the nation. The suit sought $2,000 per violation of the Consumer Protection Act and other fees. The office told Blue Sky in an email Thursday that it plans to file a motion that could render Polchlopek in default.

The growth of crowdfunding has brought new challenges all the way around.

“In general, they’ve done a good job at regulating this as much as possible,” Zeoli said of state attorneys general. “It’s a new and emerging area, so they’re trying to catch up still.”